Experts agree bank conduct could be criminal

By Ruth Williams & John Collett

The Hayne royal commission has raised the prospect that banks and super funds that charged their customers fees for no service could face criminal sanction in a bombshell hearing that could have dramatic implications for the multi-trillion dollar financial services sector.

Illustration: Matt Golding

In a major intervention on Wednesday, Commissioner Kenneth Hayne raised the question of criminal actions against NAB, just one of the big four banks along with AMP, caught-up in the fees-for-no-services scandal.

During questioning of Nicole Smith, former chairwoman of NAB's superannuation trustee Nulis Nominees, commissioner Kenneth Hayne asked whether NAB's conduct in the matter raised a question of the criminal law.

Ms Smith said that was not contemplated, prompting Mr Hayne to ask: "Did you think yourself that taking money to which there was no entitlement raised a question for criminal law?"

Ms Smith replied that she did not. Fees-for-no-service refers to where superannaution fund members of the big banks were paying fees from their accounts without having received any service, typically, financial advice, in return.

Kenneth Hayne has raised the question of criminality.

Photo: Eddie Jim

Professor Dimity Kingsford Smith, the director of the Centre for Law, Markets and Regulation atthe University of New South Wales, said officers of banks could be criminally liable for takingthe money of customers with the "intent to permanently deprive".

“Under the Commonwealth Criminal Code and state law fraud can involve reckless deception ofanother, the client, with the intention to gain a financial advantage with maximum penalties of up to 10 years in jail,” Professor Kingsford Smith said.

“There's really a horizon of state or Commonwealth statutory provisions, including from theCommonwealth Criminal Code, that prosecutions could proceed under."

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John Berrill, the principal of Berrill & Watsons, said it was a significant moment.

“What Hayne is flagging is that by repaying money or by complying with an enforceable undertaking, you may not be off-the-hook – there could be criminal penalties here,” he said.

Criminal law had a higher burden of proof than civil law, where it had to be proven beyond reasonable doubt that there has been an intention to permanently deprive, he said.

That is very different to the civil standard that is on the balance of probabilities.

The commission has previously flagged the possibility of criminal action over AMP's response to the fees-for-no-service issue over accusations it broke laws when it misled the regulator.

Ex-NAB trustee Nicole Smith outside the royal commission.

Photo: Simon Schluter

Commonwealth Bank chief executive Matt Comyn could not definitively say whether the bank had ever looked into whether its own fee for no service may be a criminal issue.

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"I don't think I can speak specifically to whether CBA has ever looked into the different elements. Or fee for no service was disclosed some time ago," Mr Comyn said at a press conference after the bank's profit results.

The CBA will appear before the current round of hearings focusing on superannuation.

"I think it would be prudent at this stage to actually just let those hearings take place.

"We obviously will respond following the royal commission's preliminary report in September," Mr Comyn said.

AMP acting chief executive Mike Wilkins, when asked if he was concerned that the royal commission's eventual recommendations may go further than was eariler flagged in the proceedings, he said AMP was focused on "prioritising our customers and restoring confidence in AMP".

ANZ and Westpac declined to comment on the comments by the commissioner concerning criminal proceedings.

Julia Angrisano, the national secretary of the Finance Sector Union of Australia (FSU) said the conduct being exposed at the commission was "some of the worst excesses by any Australian bank which has severely disadvantaged customers".

“If commissioner Hayne truly believes criminal charges are warranted when banks took money from customers when there was no entitlement to do so, then we would urge him to make appropriate recommendations," she said.

'Hopelessly conflicted'

Ms Smith also denied the bank had "got off lightly" over a fees-for-no-service breach in its superannuation arm, and that its dealings on the matter were "hopelessly conflicted".

Counsel assisting Michael Hodge, QC, on Wednesday continued to question Ms Smith over internal decision making around the potential need to repay advice fees charged to super fund members who were not actually linked to an adviser.

The commission had previously heard that the market regulator, the Australian Securities and Investments Commission (ASIC), in 2016 had flagged slapping Nulis with an enforceable undertaking (EU) over the breach, a move that - according to evidence tendered to the royal commission - NAB strongly resisted in meetings and in correspondence with the regulator.

How can (NAB) advise you about what should be done ... if it’s the one that has taken the money and will have to pay it back

Counsel assisting the commission Michael Hodge

ASIC eventually decided against an EU, instead taking the less serious step of imposing extra conditions on Nulis' financial services licence.

Mr Hodge on Wednesday questioned Ms Smith over discussions within NAB over the potential EU, including fears about the "adverse publicity" that would flow from such a move.

"Was there a discussion that you can recall about differences in adverse publicity depending upon whether an EU or a change to licence conditions occurred?" he asked Ms Smith.

"Yes," she replied.

Counsel assisting the commission, Michael Hodge.

Photo: Webcast

Mr Hodge then asked whether Ms Smith recalled "that the effect of the discussion was that there would be less adverse publicity if there was a change of licence conditions rather than enforceable undertaking" to which she replied: "Yes."

But Ms Smith had earlier rejected Mr Hodge's question on whether Nulis and NAB's wealth business regarded themselves as "getting off lightly" over the breach. Ms Smith argued that either an EU or extra licence conditions "essentially they meant we would do exactly the same thing".

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The commission has been examining the relationship between NAB wealth's super fund administrator, and NAB's superannuation trustee, Nulis, including internal discussions whether the fees in question should be repaid. It has also examined how the breach was presented to regulators ASIC and APRA.

"How can [NAB's wealth division] advise you about what should be done or make recommendations to you about what should be done if it's the one that has taken the money and will have to pay it back?" Mr Hodge asked.

Later, Ms Smith acknowledged that, while the administrator management was "in a conflicted position, I do not believe it is hopelessly conflicted".

Ms Smith, under questioning, maintained that the trustee had acted in the best interests of super fund members over the breach, because they were eventually "fully compensated".

Ms Smith had previously acknowledged that she believed the members should be repaid the fees, but had also acknowledged that decisions to remediate had taken too long in two instances.

MLC’s slow progress in shifting fund members into a low-fee MySuper fund was also examined, with Ms Smith probed over whether MLC’s decision to go on slow on the process had led to the fund’s underperformance.

Ms Smith was asked about apparent “conflicts of interest” in investment decision-making by the fund trustee, which was required to erode the profit margin of its parent – NAB – to improve the MySuper fund’s performance through diversifying investments into unlisted infrastructure and property.

The commission saw evidence that, as recently as August last year, that the MySuper portfolio manager had “voiced a strong opinion” that the fund’s investment return targets “will be very hard to meet at the current fee budget”.

Ms Smith at one point acknowledged that the fund’s trust had been unable to control how much of an investment fee was taken for profit and how much “was used to manage the investment for the benefit of members”, a situation she said had changed in 2016.

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Under earlier questioning from Mr Hodge, Ms Smith acknowledged there was a “tension in the conflict of interests in running a fiduciary business for profit, as part of a conglomerate organisation.”

Ms Smith was grilled over the time it took for NAB subsidiary MLC to move the billions of dollars worth of default super accounts – accounts into which members are chanelled when they don’t make an active choice of fund – into the MySuper option, a low-free fund mandated by 2014 federal government reforms.

Mr Hodge probed whether this slow progress had impacted returns at the MySuper option, because it meant it had less money and therefore less investment scale.

Ms Smith said the transition process for an industry fund was “relatively simple”, whereas for the NAB super funds it was more complex. When asked whether the trustee board had “pushed back” and said the timeframe was too slow, Ms Smith said there had been “a great deal of conversation”.

But she acknowledged that the trustee had not succeeded in speeding up the process – instead, “it slowed down, didn’t it?” Mr Hodge said.